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July 25, 2018

Bankruptcy courts have authority to hold in civil contempt one who refuses to comply with a bankruptcy court order, including incarceration and/or daily fines until the offender complies.[1] But when does civil contempt[2] cross into criminal contempt, which is punitive and outside the scope of the bankruptcy court’s powers?[3] While a bright-line rule is wanting, the 9th Circuit’s silence on a recent case implied that three years of incarceration plus a $1,000 daily fine to coerce compliance does not implicate criminal due process concerns and, therefore, is within the bounds of permissible bankruptcy court authority.

Kenny G Enterprises, LLC’s Chapter 11 case (which dealt with a developer named Kenny G, and not the world’s favorite saxophonist) was converted to Chapter 7, triggering a requirement

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Bankruptcy courts have authority to hold in civil contempt one who refuses to comply with a bankruptcy court order, including incarceration and/or daily fines until the offender complies.[1] But when does civil contempt[2] cross into criminal contempt, which is punitive and outside the scope of the bankruptcy court’s powers?[3] While a bright-line rule is wanting, the 9th Circuit’s silence on a recent case implied that three years of incarceration plus a $1,000 daily fine to coerce compliance does not implicate criminal due process concerns and, therefore, is within the bounds of permissible bankruptcy court authority.

Kenny G Enterprises, LLC’s Chapter 11 case (which dealt with a developer named Kenny G, and not the world’s favorite saxophonist) was converted to Chapter 7, triggering a requirement that the managing member of the debtor (“Mr. G”) turn over to the Chapter 7 trustee more than $1.4 million of debtor’s assets in Mr. G’s possession.[4] Mr. G claimed that he transferred the money to another corporation he controlled—violating a prior court order.[5] In March 2015, the United States Bankruptcy Court for the Central District of California entered an order finding Mr. G in civil contempt for failing to turn over the money, finding Mr. G’s excuse “entirely fiction[al]” and affording Mr. G a few months to comply before issuing further sanctions.[6]

At a subsequent hearing, Mr. G admitted that he had not turned over the money but alleged it was “impossible” to comply with the contempt order, claiming a financial inability to pay despite his supposed $6.7 million net worth.[7] The bankruptcy court agreed that a self-induced impossibility is a defense to civil contempt, but Mr. G failed to meet the high burden of proof.[8] The bankruptcy court therefore ordered Mr. G incarcerated until he paid the estate as previously ordered, and imposed a sanction of $1,000 for each day of non-compliance.[9] Mr. G appealed the contempt order to the district court, which affirmed in part but sustained the appeal as to a sanctions cap beyond the $1.4 million turnover requirement.[10] Mr. G then appealed to the Ninth Circuit Court of Appeals.[11]

In a 2017 ruling, the 9th Circuit affirmed the entirety of the bankruptcy court’s order as a permissible exercise of the bankruptcy court’s civil contempt powers under 11 U.S.C. §105(a), which authorizes the bankruptcy court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”[12] “Because complying with the bankruptcy court’s order will cure [Mr. G’s] contempt,” the Ninth Circuit found permissible the bankruptcy court’s order requiring incarceration and daily fines until turnover occurred.[13] The Ninth Circuit expressly disagreed with the district court’s conclusion that sanctions must be capped at $1.4 million subject to turnover; rather, the Ninth Circuit reasoned that per diem fines that are coercive rather than punitive fall within the bankruptcy court’s civil contempt authority.[14] However, the Ninth Circuit Court of Appeals indicated coercive sanctions may not proceed indefinitely. “At some point,” the court wrote, “due process considerations will require the bankruptcy court to conclude that [the] continued detention and the daily $1,000 sanctions have ceased to be coercive and instead have become punitive,” at which point, Mr. G must be released from custody.[15]

Mr. G had also appealed the bankruptcy court’s factual conclusion that he failed to satisfy his burden of proving impossibility.[16] After the district court affirmed, Mr. G appealed to the Ninth Circuit. Given the duration of Mr. G’s incarceration and mounting daily fines, some anticipated the Ninth Circuit to revisit whether the bankruptcy court’s contempt order had become punitive or whether it remained coercive. However, in its June 2018 decision, the Ninth Circuit upheld the bankruptcy court’s orders—remaining silent as to whether the three years of incarceration and daily fines crossed the line from permissible sanctions to criminal contempt, suggesting that no criminal due process issues had yet matured.

The Ninth Circuit’s rulings serve as a harsh reminder that bankruptcy courts wield substantial contempt power to coerce compliance with orders. If dealing with a challenging party, litigants should keep in mind how far this case went to seek to force compliance with bankruptcy court orders.

[14] Citing Shillitani v. United States, 384 U.S. 364, 368 (1966) (“When the petitioners carry the keys of their prison in their own pockets, the action is essentially a civil remedy designed for the benefit of other parties and has quite properly been exercised for centuries to secure compliance with judicial decrees.”).

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